You should have a few leading and lagging indicators to indicate success. Leading indicators signal momentum while lagging indicators are financial factors that confirm your momentum. Leading indicators may feel soft, but they are important. Lagging indicators are quantifiable and reveal impact back to the business.
Here’s a simple scorecard to help you think about it:
Here the the definitions for the lagging indicators:
- Gross Renewal Rate (GRR): Measures how much revenue you kept in your customer base in a given period.
- Expansion Rate: Measures how much revenue grew in your customer base in a given period.
- Net Retention Rate (NRR): Measures how much your revenue has grown or shrunk over a period by netting expansion, declines, and defections in your customer base in a given period.
NRR is the North Star
NRR rewards your team for expanding and growing your customer base. The calculation can be done with ARR or MRR like so:
NRR = (Beginning ARR – Churn + Expansion) / (Beginning ARR)
Best in class NRR is anything over 120%. Anything less than 100% NRR means you are losing more than you are bringing in.
There are 3 things you can do to improve NRR:
- Reduce churn: identify factors that signal risk, automate it a dashboard, and execute save actions. Risk factors include low usage, high support ticket resolution times, lack of sponsors, customers not paying their bill, and customer M&A activity.
- Drive usage: have a playbook and work with the product team to embed Product Led Growth directly into the services.
- Expand usage: introduce new modules that integrate with capabilities the client is already using or take the solution to another LOB at the client.
Enterprise Value (EV)/Revenue ratios which show a clear positive relationship between a company’s NRR and EV/Revenue Ratio. The data suggests that for each percentage point increase in NRR, there’s an additional 0.7X change in a company’s revenue multiple.  This means, if you have a $100M revenue Cloud company, a 1% increase in NRR translates into more than $70M in enterprise value.